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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D. C. 20549

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Form 10-Q

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(Mark One)

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

For the quarter ended October 31, 2001

OR

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission file number 000-22009

NEOMAGIC CORPORATION(Exact name of Registrant as specified in its charter)

DELAWARE

77-0344424[State or other jurisdiction
of incorporation or organization]

[I.R.S. Employer
Identification No.]3250 Jay Street
Santa Clara, California

95054[Address of principal executive offices]

[Zip Code]


(408) 988-7020[Registrant's telephone number, including area code]

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Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes
/x/    No / /

The
number of shares of the Registrant's Common Stock, $.001 par value, outstanding at October 31, 2001 was 26,285,102.

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NEOMAGIC CORPORATION
FORM 10-Q

INDEX

|                                                     |  |                                                                                                       |  | PAGE
|---------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------- |  | ----
|PART I. CONSOLIDATED CONDENSED FINANCIAL INFORMATION |  |                                                                                                      
|Item 1.                                              |  | Unaudited Consolidated Condensed Financial Statements:                                                |  |     
|                                                     |  | Consolidated Condensed Statements of Operations
Three and Nine months ended October 31, 2001 and 2000 |  | 3   
|                                                     |  | Consolidated Condensed Balance Sheets
October 31, 2001 and January 31, 2001                           |  | 4   
|                                                     |  | Consolidated Condensed Statements of Cash Flows
Nine months ended October 31, 2001 and 2000           |  | 5   
|                                                     |  | Notes to Unaudited Consolidated Condensed Financial Statements                                        |  | 6-8 
|Item 2.                                              |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                 |  | 9-16
|Item 3.                                              |  | Quantitative and Qualitative Disclosures about Market Risk                                            |  | 16  
|PART II. OTHER INFORMATION                           |  |                                                                                                      
|Item 1.                                              |  | Legal Proceedings                                                                                     |  | 17  
|Item 2.                                              |  | Changes in Securities                                                                                 |  | 17  
|Item 3.                                              |  | Defaults Upon Senior Securities                                                                       |  | 17  
|Item 4.                                              |  | Submission of Matters to a Vote of Security Holders                                                   |  | 17  
|Item 5.                                              |  | Other Information                                                                                     |  | 17  
|Item 6.                                              |  | Exhibits and Reports on Form 8-K                                                                      |  | 17  
|Signatures                                           |  | 18                                                                                                   

Page 2 of 18

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Part I. Financial Information

Item I. Financial Statements

NEOMAGIC CORPORATION  CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS(In thousands, except per share data)  (Unaudited)

|                                                              |                                                      | Three Months Ended |                          | Nine Months Ended |  
|------------------------------------------------------------- | ---------------------------------------------------- | ------------------ | ------------------------ | ----------------- | -
|
|Net sales                                                     |                                                      | $                  | 83                       |                   | $
|Cost of sales                                                 |                                                      |                    | 1                        |                   |  
|                                                              |                                                      |                    |                          |                   |  
|Gross margin                                                  |                                                      |                    | 82                       |                   |  
|Operating expenses:                                           |                                                      |                    |                          |                   |  
|                                                              | Research and development (1)                         |                    |                          | 5,541             |  
|                                                              | Sales, general and administrative (2)                |                    |                          | 1,736             |  
|                                                              | Amortization of deferred compensation                |                    |                          | 621               |  
|                                                              |                                                      |                    |                          |                   |  
|                                                              |                                                      |                    | Total operating expenses |                   |  
|                                                              |                                                      |                    |                          |                   |  
|Loss from operations                                          |                                                      |                    | (7,816                   | )                 |  
|Other income (expense), net:                                  |                                                      |                    |                          |                   |  
|                                                              | Income, net of expenses, from the sale of DVD assets |                    |                          |                  |  
|                                                              | Interest and other income                            |                    |                          | 843               |  
|                                                              | Interest expense                                     |                    |                          |                  |  
|                                                              |                                                      |                    |                          |                   |  
|Loss before income taxes                                      |                                                      |                    | (6,973                   | )                 |  
|Income tax benefit                                            |                                                      |                    | (188                     | )                 |  
|                                                              |                                                      |                    |                          |                   |  
|Net loss                                                      |                                                      | $                  | (6,785                   | )                 | $
|                                                              |                                                      |                    |                          |                   |  
|Basic net loss per share                                      |                                                      | $                  | (.26                     | )                 | $
|Diluted net loss per share                                    |                                                      | $                  | (.26                     | )                 | $
|Weighted average common shares outstanding                    |                                                      |                    | 26,263                   |                   |  
|Weighted average common shares outstanding, assuming dilution |                                                      |                    | 26,263                   |                   |  

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See
accompanying notes to consolidated condensed financial statements.

Page 3 of 18

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NEOMAGIC CORPORATION  CONSOLIDATED CONDENSED BALANCE SHEETS(In thousands)

|                                     |                                               | October 31,
2001 |                                            | January 31,
2001(1) |  
|------------------------------------ | --------------------------------------------- | ---------------- | ------------------------------------------ | ------------------- | -
|
|ASSETS                               |                                               |                  |                                            |                     |  
|Current assets:                      |                                               |                  |                                            |                     |  
|                                     | Cash and cash equivalents                     |                  | $                                          | 48,981              |  
|                                     | Short-term investments                        |                  |                                            | 30,092              |  
|                                     | Accounts receivable, net                      |                  |                                            | 1                   |  
|                                     | Other current assets                          |                  |                                            | 3,868               |  
|                                     |                                               |                  |                                            |                     |  
|                                     |                                               |                  | Total current assets                       |                     |  
|Property, plant and equipment, net   |                                               |                  | 3,783                                      |                     |  
|Restricted cash                      |                                               |                  | 15,000                                     |                     |  
|Deferred tax asset                   |                                               |                  | 264                                        |                     |  
|Other assets                         |                                               |                  | 3,438                                      |                     |  
|                                     |                                               |                  |                                            |                     |  
|                                     |                                               |                  | Total assets                               |                     | $
|                                     |                                               |                  |                                            |                     |  
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                               |                  |                                            |                     |  
|Current liabilities:                 |                                               |                  |                                            |                     |  
|                                     | Accounts payable                              |                  |                                            | 2,104               |  
|                                     | Compensation and related benefits             |                  |                                            | 1,376               |  
|                                     | Income taxes payable                          |                  |                                            | 2,581               |  
|                                     | Deferred rent                                 |                  |                                            | 558                 |  
|                                     | Deferred gain on the sale of DVD assets       |                  |                                            | 750                 |  
|                                     | Advances from customers                       |                  |                                            | 92                  |  
|                                     | Other accruals                                |                  |                                            | 571                 |  
|                                     |                                               |                  |                                            |                     |  
|                                     |                                               |                  | Total current liabilities                  |                     |  
|Commitments and contingencies        |                                               |                  |                                            |                     |  
|Stockholders' equity:                |                                               |                  |                                            |                     |  
|                                     | Common stock                                  |                  |                                            | 26                  |  
|                                     | Additional paid-in-capital                    |                  |                                            | 77,212              |  
|                                     | Notes receivable from stockholders            |                  |                                            | (71                 | )
|                                     | Deferred compensation                         |                  |                                            | (1,472              | )
|                                     | Accumulated other comprehensive income (loss) |                  |                                            | 68                  |  
|                                     | Retained earnings                             |                  |                                            | 21,632              |  
|                                     |                                               |                  |                                            |                     |  
|                                     |                                               |                  | Total stockholders' equity                 |                     |  
|                                     |                                               |                  |                                            |                     |  
|                                     |                                               |                  | Total liabilities and stockholders' equity |                     | $
|                                     |                                               |                  |                                            |                     |  

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See
accompanying notes to consolidated condensed financial statements.

Page 4 of 18

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NEOMAGIC CORPORATION  CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS(In thousands)  (Unaudited)

|                                                                                           |                                                          | Nine Months Ended                 |        
|------------------------------------------------------------------------------------------ | -------------------------------------------------------- | --------------------------------- | -------
|
|Operating activities:                                                                      |                                                          |                                   |        
|Net loss                                                                                   |                                                          | $                                 | (21,060
|Adjustments to reconcile net loss to net cash provided by (used for) operating activities: |                                                          |                                   |        
|                                                                                           | Depreciation and amortization                            |                                   |        
|                                                                                           | Loss on disposal of property, plant and equipment        |                                   |        
|                                                                                           | Amortization of deferred compensation                    |                                   |        
|                                                                                           | Gain on sale of DVD assets                               |                                   |        
|                                                                                           | Changes in operating assets and liabilities:             |                                   |        
|                                                                                           |                                                          | Accounts receivable               |        
|                                                                                           |                                                          | Inventory                         |        
|                                                                                           |                                                          | Other current assets              |        
|                                                                                           |                                                          | Restricted cash                   |        
|                                                                                           |                                                          | Other assets                      |        
|                                                                                           |                                                          | Accounts payable                  |        
|                                                                                           |                                                          | Compensation and related benefits |        
|                                                                                           |                                                          | Income taxes payable              |        
|                                                                                           |                                                          | Other accruals                    |        
|                                                                                           |                                                          |                                   |        
|Net cash provided by (used for) operating activities                                       |                                                          |                                   | (28,505
|                                                                                           |                                                          |                                   |        
|Investing activities:                                                                      |                                                          |                                   |        
|                                                                                           | Net proceeds from the sale of DVD assets                 |                                   |        
|                                                                                           | Purchases of property, plant and equipment               |                                   |        
|                                                                                           | Proceeds from the sale of property, plant, and equipment |                                   |        
|                                                                                           | Purchases of short-term investments                      |                                   |        
|                                                                                           | Maturities of short-term investments                     |                                   |        
|                                                                                           |                                                          |                                   |        
|Net cash provided by investing activities                                                  |                                                          |                                   | 4,021  
|                                                                                           |                                                          |                                   |        
|Financing activities:                                                                      |                                                          |                                   |        
|                                                                                           | Payments on lease obligation                             |                                   |        
|                                                                                           | Repayment on note receivable from stockholders           |                                   |        
|                                                                                           | Net proceeds from issuance of common stock               |                                   |        
|                                                                                           |                                                          |                                   |        
|Net cash provided by financing activities                                                  |                                                          |                                   | 613    
|                                                                                           |                                                          |                                   |        
|Net increase (decrease) in cash and cash equivalents                                       |                                                          |                                   | (23,871
|Cash and cash equivalents at beginning of period                                           |                                                          |                                   | 72,852 
|                                                                                           |                                                          |                                   |        
|Cash and cash equivalents at end of period                                                 |                                                          | $                                 | 48,981 
|                                                                                           |                                                          |                                   |        
|Supplemental schedules of cash flow information:                                           |                                                          |                                   |        
|Cash paid (received) during the period for:                                                |                                                          |                                   |        
|                                                                                           | Interest                                                 |                                   | $      
|                                                                                           | Taxes paid (refunded)                                    |                                   | $      

See
accompanying notes to consolidated condensed financial statements.

Page 5 of 18

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NEOMAGIC CORPORATION  NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1. Basis of Presentation:

The unaudited consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission
and include the accounts of NeoMagic Corporation and its wholly owned subsidiaries collectively ("NeoMagic" or the "Company"). Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, the
financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position at October 31, 2001, the operating
results for the three and nine months ended October 31, 2001 and 2000, and the cash flows for the nine months ended October 31, 2001 and 2000. These financial statements and notes should
be read in conjunction with the Company's audited financial statements and notes thereto for the year ended January 31, 2001, included in the Company's Form 10-K filed with
the Securities and Exchange Commission.

The
results of operations for the three and nine months ended October 31, 2001 are not necessarily indicative of the results that may be expected for the year ending
January 31, 2002.

The
third fiscal quarters of 2002 and 2001 ended on October 28, 2001 and October 29, 2000, respectively. For ease of presentation, the accompanying financial statements
have been shown as ending on the last day of the calendar month of October.

2. Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS 137, establishes methods for recording derivative financial instruments and hedging
activities related to those instruments, as well as other hedging activities. As required, the Company adopted SFAS 133 effective February 1, 2001. Because NeoMagic does not currently
hold any derivative instruments and does not engage in hedging activities the adoption of SFAS 133, as amended by SFAS 137, did not have a significant impact on its consolidated
financial position or results of operations.

In
July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 141, "Business Combination" ("SFAS 141") and
Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 eliminates the pooling-of-interests
method of accounting for business combinations except for qualifying business combinations that are initiated prior to July 1, 2001. SFAS 141 further clarifies the criteria to recognize
intangible assets separately from goodwill. The requirements of SFAS 141 are effective for any business combination accounted for by the purchase method that is completed after June 30,
2001 (i.e., the acquisition date is July 1, 2001 or thereafter). Under SFAS 142, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed annually (or
more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The
Company will adopt both statements as of the beginning of its fiscal 2003. The effect of adoption of the Standards is currently being evaluated, but is not expected to have a material effect on the
Company's financial position or results of operations.

In
October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which applies to financial statements issued
for fiscal years beginning after December 15, 2001. SFAS 144 supersedes FASB Statement 121, "Accounting for the Impairment of

Page 6 of 18

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Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and portions of APB Opinion 30, "Reporting the Results of Operations." SFAS 144 provides a single
accounting model for long-lived assets to be disposed of and significantly changes the criteria for classifying an asset as held-for-sale. Classification as
held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value or carrying amount. SFAS 144 also requires
expected future operating losses from discontinued operations to be displayed in the period(s) in which the losses are incurred, rather than as of the measurement date as presently required. The
effect of adoption of the Standards is currently being evaluated, but is not expected to have a material effect on the Company's financial position or results of operations.

3. Earnings Per Share:

The
Company follows the provisions of Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings per Share." Basic net earnings (loss) per share is
computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income per share is calculated using the weighted average number of
common and dilutive common equivalent shares outstanding (if applicable) during the period. Dilutive common equivalent shares consist of stock options. Employee stock options are excluded from the
computation of diluted net loss per share for the three-month periods ended October 31, 2001 and October 31, 2000, respectively, and the nine-month periods ended
October 31, 2001 and October 31, 2000, respectively, because the effect would have been antidilutive.

Per
share information calculated on this basis is as follows:

|                                 |                                                                          | Three Months Ended
October 31,         |        | Nine Months Ended
October 31, |       
|-------------------------------- | ------------------------------------------------------------------------ | -------------------------------------- | ------ | ----------------------------- | ------
|
|
|Numerator:                       |                                                                          |                                        |        |                               |       
|Net loss                         |                                                                          | $                                      | (6,785 | )                             | $     
|Denominator:                     |                                                                          |                                        |        |                               |       
|                                 | Denominator for basic loss per share-weighted average shares outstanding |                                        |        | 26,263                        |       
|                                 | Effect of dilutive securities:                                           |                                        |        |                               |       
|                                 |                                                                          | Employee stock options                 |        |                               | n/a   
|                                 |                                                                          |                                        |        |                               |       
|                                 |                                                                          | Denominator for diluted loss per share |        |                               | 26,263
|                                 |                                                                          |                                        |        |                               |       
|Basic and diluted loss per share |                                                                          | $                                      | (.26   | )                             | $     

For
the three months ended October 31, 2001 and October 31, 2000, respectively, and for the nine months ended October 31, 2001 and October 31, 2000,
respectively, basic loss per share equals diluted loss per share due to the anti-dilutive effect of stock options.

4. Divestitures:

In fiscal year 2000, the Company decided not to pursue the further development of technologies acquired from Mitel for the DVD market. In April 2000,
pursuant to an asset purchase agreement, the Company sold the principal assets of the DVD product group to LSI Logic ("Buyer"). The assets

Page 7 of 18

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primarily consisted of fixed assets and intangible assets. In exchange for the assets sold to the Buyer, the Company received $11.7 million in a lump-sum cash payment. An additional
$2.3 million was contingent on the Company's performance of certain obligations related to the transfer of licenses with third parties to the Buyer. The Company wrote-off
approximately $3.6 million in capitalized intellectual property, fixed assets and prepaid expenses related to the DVD product group, which was transferred to the Buyer. In addition, the Company
accrued approximately $0.6 million in transaction costs and approximately $2.3 million in retention packages for the affected employees during the first quarter of fiscal 2001. During
the second quarter of fiscal 2001, the Company incurred additional costs of $0.3 million. During the third quarter of fiscal 2001, the Company received a $1.5 million cash payment which
was previously contingent on the Company's performance of certain obligations related to the transfer of licenses with third parties to the Buyer. As a result, the Company has recorded a total
pre-tax gain of approximately $6.5 million on the sale, which is recorded in Income, net of expenses, from the sale of DVD assets on the Consolidated Condensed Statements of
Operations for the nine months ended October 31, 2000 and a gain of $1.5 million for the three months ended Octpber 31, 2000. A total pre-tax gain of $6.5 million was
recorded for the fiscal year ended January 31, 2001.

5. Accumulated Other Comprehensive Income (Loss)

Total accumulated other comprehensive income (loss) was $68 thousand at October 31, 2001 and $(20) thousand at January 31, 2001.
Accumulated other comprehensive income (loss) consists entirely of unrealized gains/(losses) on available for sale securities.

6. Subsequent Events

On December 6, 2001 the Company signed an agreement to acquire the assets and intellectual properties of LinkUp Systems Corporation in exchange for
1,600,000 shares of NeoMagic Corporation's Common Stock. The completion of the transaction is subject to customary closing conditions, including LinkUp Systems Corporation's shareholder approval,
which is expected to occur in December 2001.

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Part I. Financial Information

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

When used in this discussion, the words "expects," "anticipates," "believes" and similar expressions are intended to identify forward-looking statements. Such
statements reflect management's current intentions and expectations. However, actual events and results could vary significantly based on a variety of factors including, but not limited to: the
abilities of manufacturing subcontractors to make adequate and timely deliveries, the ability to attract customers, and to recruit and retain employees including those with engineering expertise in
new disciplines. In particular, the Company's new product development efforts and customer engagements in System-on-Chip integration represents a new endeavor and consequently
carry greater risk of successful and timely execution. Additional risk factors are listed in the Company's Form 10-K filed for the fiscal year ended January 31, 2001.

Overview

NeoMagic's first major commercial undertakings were the design, development and marketing of multimedia accelerators for sale to notebook computer
manufacturers. The Company pioneered the first commercially available high-performance silicon technology that integrated DRAM, complex logic and analog circuits into a single chip, a proprietary
capability which the Company refers to as its MagicWare® embedded DRAM technology. Using this technology the Company's products achieved superior graphics, video and audio performance
while actually lowering the power consumption and extending the battery life for smaller, lighter weight portable devices. The Company has exited the market for notebook multimedia ICs and is now
focused on developing and selling highly integrated semiconductors and software, combining advanced processing cores with its multimedia hardware acceleration and audio and video capabilities, for new
generations of Handheld Internet Appliances. NeoMagic believes that the market for these devices will expand rapidly as Personal Digital Assistants (PDAs), cellular phones, and portable entertainment
devices grow in their capabilities and their consumer market appeal. The Company believes these devices will increasingly rely on System-on-Chip (SOC) levels of integration, combining CPU and
multimedia hardware, as well as other functions, into single-chip solutions.

During
the second quarter of fiscal 2002 the Company introduced its new MiMagicTM family of System-on-Chip solutions for Handheld Internet Appliances. The MiMagic family
provides highly integrated
semiconductors and software for smart handheld electronics, combining advanced processing cores and multimedia hardware acceleration to enable new generations of Handheld Internet Appliances. The
MiMagic NMS7040 and MiMagic NMS7041 are the first two products introduced to date in the MiMagic family. The MiMagic NMS7040 integrates a 32-bit MIPS RISC processor, high performance 2D graphics,
8-channel audio controller, 4 Megabytes of DRAM, and a broad set of peripherals including LCD touch screen interface and multiple USB host ports, all into a single Chip. The MiMagic NMS7041 has all of
these features, and adds a 50 million pixel-per second 3D graphics setup and rendering pipeline for graphics-intensive applications and exciting electronics game play. The Company has begun
demonstrating its new product family and has shipped engineering samples and boards to initial customers. The Company expects to be ready to ship production units within the next several months. The
timing and volume of shipments will depend on the Company's ability to achieve design wins.

In
January 2001, the Company extended its wafer supply agreement with Infineon through fiscal 2004 to support the Company's new product efforts. Under the terms of the
agreement, NeoMagic will make use of Infineon's 0.20 micron and 0.17 micron embedded DRAM process technologies. The agreement also provides for access to additional capacity and more advanced process
technologies as they become available. NeoMagic has provided $15.0 million in guarantees towards its purchases over the term of the agreement. To secure this agreement, the Company opened an
irrevocable standby letter of credit (LOC) in the amount of $15.0 million in February 2001. The Company has secured the LOC with a $15.0 million deposit at the issuing bank. These
funds are being shown on the Company's

Page 9 of 18

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Consolidated Condensed Balance Sheets as restricted cash while the letter of credit remains in place. The amount will be drawn down as NeoMagic purchases wafers from Infineon over the term of the
agreement through February 2004.

In
March 2001, the Company reduced its workforce in the U.S. by 18 and in Israel by 25 to be more in-line with its plans for fiscal year 2002. The Company accrued
severance charges of $0.7 million associated with the reduction in workforce during the first quarter of fiscal 2002 and made cash payments of $0.4 million in connection with this
restructuring activity. During the second quarter of fiscal 2002 the Company completed the restructuring activity by making additional cash payments of $0.4 million of which $0.3 million
was charged against the accrual and $0.1 million was expensed.

The
Company expects minimal future revenue from its legacy notebook multimedia IC business and does not expect significant revenues from its new product efforts in fiscal 2002. During
the remainder of fiscal 2002, the Company's financial management will continue to emphasize the preservation of cash.  The Company expects to end fiscal 2002 with over
$85 million in cash and equivalents, short-term investments, and restricted cash.

On
December 6, 2001 the Company announced it had signed an agreement to acquire the assets and intellectual properties of LinkUp Systems Corporation ("LinkUp") of Santa Clara,
California, in
exchange for 1,600,000 shares of NeoMagic Common Stock. The transaction will be accounted for under the purchase method. Completion of the transaction is subject to customary closing conditions,
including LinkUp shareholder approval, which is expected to occur in December. The Company expects the majority of LinkUp's 28 employees to join its workforce. NeoMagic does not expect this
transaction to have a material effect on its cash or cash equivalents for the current fiscal year. LinkUp produces SOC solutions using RISC CPU cores licensed from ARM Ltd. NeoMagic intends to support
current LinkUp products and customers and, through this acquisition, to accelerate the development of new SOC solutions with low-power, high performance multimedia capabilities.

The
Company's fiscal year end is January 31. Any references herein to a fiscal year refer to the year ended January 31 of such year. The third fiscal quarters of 2002
and 2001 ended on October 28, 2001 and October 29, 2000, respectively. For ease of presentation, the accompanying financial statements have been shown as ending on the last day of the
calendar month of October.

Results of Operations

Net sales

The Company's net sales to date have been generated from the sale of its multimedia accelerators to the personal computer industry. The Company has now exited
the notebook multimedia market. Net sales were $83 thousand for the three months ended October 31, 2001, compared to $3.9 million for the three months ended October 31,
2000. Net sales were $351 thousand for the nine months ended October 31, 2001, compared to $74.7 million for the nine months ended October 31, 2000. Net sales decreased due
to the Company's exit from the notebook multimedia market. The Company expects minimal sales of its legacy products for the remainder of fiscal 2002. The Company does not expect significant revenues
from its new product efforts in fiscal 2002.

Sales
to customers located outside the United States (including sales to the foreign operations of customers with headquarters in the United States, and foreign system manufacturers
that sell to United States-based OEMs) accounted for 73.2% and 98.5% of net sales in the three months ended October 31, 2001 and 2000, respectively. Export sales accounted for 91.9% and 85.3%
of net sales in the nine months ended October 31, 2001 and 2000, respectively. All sales transactions were denominated in United States dollars.

One
customer accounted for 87% of net sales for the three months ended October 31, 2001. Three customers accounted for 34%, 16%, and 13% of net sales in the three months ended
October 31, 2000. Four customers accounted for 41%, 23%, 17%, and 11% of net sales for the nine months ended

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October 31, 2001. Four customers accounted for 26%, 22%, 15% and 14% of net sales for the nine months ended October 31, 2000.

Gross Margin

Gross margin was $82 thousand and $3.2 million for the three months ended October 31, 2001 and 2000, respectively. Gross margin was
$343 thousand and $13.5 million for the nine months ended October 31, 2001 and 2000, respectively. The Company had minimal sales of its fully reserved legacy notebook products in
the three and nine months ended October 31, 2001. The Company expects minimal sales of its legacy products for the remainder of fiscal 2002 and does not expect significant revenues from its new
product efforts in fiscal 2002. Gross margin for the nine months ended October 31, 2000 includes inventory write-offs and reserves and cancellation penalties to our manufacturing
partners of $11.9 million related to restructuring the business.

Research and Development Expenses

Research and development expenses include compensation and associated costs relating to development personnel, operating system software costs and prototyping
costs, which are comprised of photomask costs, pre-production wafer costs, and amortization of ACL acquisition costs. Research and development expenses were $5.6 million and
$5.8 million for the three months ended October 31, 2001 and 2000, respectively. Research and development expenses were $17.8 million and $18.5 million for the nine months
ended October 31, 2001 and 2000, respectively. The decrease for the three months ended October 31, 2001 is primarily related to lower labor costs due to reduced headcount as well as
lower consulting costs. The decrease for the nine months ended October 31, 2001 primarily relates to lower labor costs due to reduced headcount offset somewhat by higher photomask costs
associated with the Company's new product development effort in the Handheld Internet Appliance market. The Company has made, and intends to continue to make, significant investments in research and
development as it focuses on developing products for the Handheld Internet Appliance market. Research and development expenses are expected to decrease slightly in absolute dollars in fiscal 2002.

Sales, General and Administrative Expenses

Sales, general and administrative expenses were $1.7 million and $2.2 million for the three months ended October 31, 2001 and 2000,
respectively. Sales, general and administrative expenses were $5.4 million and $10.5 million for the nine months ended October 31, 2001 and 2000, respectively. Sales, general and
administrative expenses decreased in absolute dollars due primarily to decreased commissions on lower sales resulting from the Company's exit from the notebook multimedia market. The decrease is also
due to $0.8 million of employee related severance expenses incurred in the first quarter of fiscal 2001 in
connection with restructuring the business and legal expenses incurred in the first three quarters of fiscal 2001 associated with the Trident lawsuit. Lower headcount in fiscal year 2002 also
contributed to the decrease. Sales, general and administrative expenses are expected to decrease in absolute dollars in fiscal 2002.

Amortization of Deferred Compensation

In the last three quarters of fiscal 2001, the Company granted stock options to employees and recorded deferred stock compensation within stockholders' equity
of $6.4 million, representing the difference between the fair market value of the common stock at the date of grant and the exercise price of these options at the date of grant. In the fourth
quarter of fiscal 2001 the Company also recorded deferred stock compensation of $0.4 million in connection with its employee stock purchase plan. The Company recorded additional deferred stock
compensation of $43,000 for the first quarter of fiscal 2002 and $302,000 in the second quarter of fiscal 2002. Amortization of deferred compensation was $621,000 and $817,000 for the three months
ended October 31, 2001 and 2000, respectively. Amortization for the three months ended October 31, 2000 includes amortization of deferred compensation charged to cost of sales of
$12,000. Amortization of deferred compensation was $1,885,000 and $1,726,000 for the nine months ended October 31, 2001 and 2000, respectively. Amortization for the nine months ended
October 31, 2000 includes amortization of deferred compensation charged to cost of sales of $28,000.

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Income Net of Expenses from Sale of DVD Assets

In fiscal year 2000, the Company decided not to pursue the further development of technologies acquired from Mitel for the DVD market. In April 2000,
pursuant to an asset purchase agreement, the Company sold the principal assets of the DVD product group to LSI Logic ("Buyer"). The assets primarily consisted of fixed assets and intangible assets. In
exchange for the assets sold to the Buyer, the Company received $11.7 million in a lump-sum cash payment. An additional $2.3 million was contingent on the Company's
performance of certain obligations related to the transfer of licenses with third parties to the Buyer. The Company wrote-off approximately $3.6 million in capitalized intellectual
property, fixed assets and prepaid expenses related to the DVD product group, which was transferred to the Buyer. In addition, the Company accrued approximately $0.6 million in transaction
costs and approximately $2.3 million in retention packages for the affected employees during the first quarter. During the second quarter of fiscal 2001, the Company incurred additional costs
of $0.3 million. During the third quarter of fiscal 2001, the Company received a $1.5 million cash payment which was previously contingent on the Company's performance of certain
obligations related to the transfer of licenses with third parties to the Buyer. As a result, the Company has recorded a total pre-tax gain of approximately $6.5 million on the
sale, which is recorded in Income, net of expenses, from the sale of DVD assets on the Consolidated Condensed Statements of Operations for the nine months ended October 31, 2000 and a gain of
$1.5 million for the three months ended October 31, 2000. A total pre-tax gain of $6.5 million was recorded for the fiscal year ended January 31, 2001.

Interest and Other Income (Expense)

The Company earns interest on its cash equivalents, short-term investments, and restricted cash. Interest and other income was $0.9 million
and $1.8 million for the three months ended October 31, 2001 and 2000, respectively. Interest and other income was $3.0 million and $4.3 million for the nine months ended
October 31, 2001 and 2000, respectively. The decrease in interest and other income stemmed primarily from lower interest income earned on lower average cash balances and from significant
interest rate reductions that occurred in fiscal 2002. The Company expects declining interest income for the remainder of fiscal 2002 due to decreasing cash and investment balances.

Interest Expense

Interest expense was $0 for the three months ended October 31, 2001 and 2000. Interest expense was $11,000 and $262,000 for the nine months ended
October 31, 2001 and 2000, respectively. The decrease in interest expense for the nine months ended October 31, 2001 is due to the significant reduction of capital lease balances during
fiscal 2002.

Income Taxes

The Company has provided an income taxes benefit of $0.2 million for the third quarter of fiscal 2002. The effective tax benefit for the nine months
ended October 31, 2001 was 3.5%, which represents a carryback refund due to the company. The rate differs from that of the nine months ended October 31, 2000 due to management's decision
not to benefit the Company's current year net operating loss and tax credits in excess of the amount that can be recovered via carryback claims. The deferred tax assets associated with the net
operating loss and tax credits have been partially offset by a valuation allowance.

Liquidity and Capital Resources

The Company's cash, cash equivalents and short-term investments decreased $28.7 million in the nine months ended October 31, 2001 to
$79.1 million from $107.8 million at January 31, 2001. The decrease in cash, cash equivalents and short-term investments stems primarily from cash used in

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operating activities which includes the Company's deposit of $15 million to establish an irrevocable standby letter of credit in accordance with the extension of its wafer supply agreement with
Infineon and a net loss of $21.1 million offset by a $5.7 million federal tax refund. The $15 million deposit to establish the letter of credit is being shown on the Company's
Consolidated Condensed Balance Sheets as restricted cash while the letter of credit remains in place.

Cash
and cash equivalents used for operating activities for the nine months ended October 31, 2001 was $28.5 million, compared to $6.8 million of net cash
provided by operating activities for the nine months ended October 31, 2000. The cash used for operating activities stems primarily from the Company's deposit of $15.0 million to
establish an irrevocable standby letter of credit in accordance with the extension of its wafer supply agreement with Infineon, a net loss of $21.1 million, a decrease in accounts payable,
compensation and related benefits, and other accruals, partially offset by an increase in income taxes payable, decreases in other current assets and other assets, and non-cash
depreciation and amortization charges.

Net
cash provided by investing activities for the nine months ended October 31, 2001, was $4.0 million, compared to $31.3 million of net cash provided by
investing activities for the nine months ended October 31, 2000. Net cash provided by investing activities for the nine months ended October 31, 2001 related primarily to net proceeds
from the maturities of short-term investments of $4.9 million, partially offset by purchases of property, plant and equipment of $0.9 million. Net cash provided for the nine
months ended October 31, 2000 related primarily to net proceeds from the sale of the DVD group of
$10.1 million and net maturities of short-term investments of $22.8 million, partially offset by purchases of property, plant and equipment. Continued operation of the
Company's business may require higher levels of capital equipment purchases, technology investments, foundry investments and other payments to secure manufacturing
capacity.The timing and amount of future investments will depend primarily on the level of the Company's future revenues.

Net
cash provided by financing activities was $0.6 million for the nine months ended October 31, 2001, compared to $0.4 million of net cash provided by financing
activities for the nine months ended October 31, 2000. The net cash provided by financing activities primarily represents net proceeds from the issuance of common stock and repayments on notes
receivable from stockholders.

At
October 31, 2001, the Company's principal sources of liquidity included cash, cash equivalents and short-term investments of $79.1 million. The Company
believes that it will not generate cash from operations during the next twelve months. The Company believes the current cash, cash equivalents and short-term investments will satisfy the
Company's projected working capital and capital expenditure requirements through the next twelve months. Investments will continue in new product development in new and existing areas of technology.
The Company's future capital requirements will depend on many factors including the rate of net sales, the timing and extent of spending to support research and development programs, the timing of any
new product introductions and enhancements to existing products, and market acceptance of the Company's products.

Factors that May Affect Results

Fluctuations in Quarterly Operating Results

NeoMagic's quarterly and annual results of operations are affected by a variety of factors that could materially adversely affect net sales, gross margin and
operating results. These factors include, among others, the rate of decline in shipments of legacy products to current NeoMagic customers, the abilities of manufacturing subcontractors to make
adequate and timely deliveries, access to advanced production process technologies from manufacturing subcontractors, recruiting and retaining employees including those with engineering expertise in
new disciplines, the Company's ability to develop and market new products, restructuring charges, and litigation involving antitrust, intellectual property, and other issues. In particular, the
Company's new product development efforts in System-on-Chip

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integration and MPEG-4 for Handheld Internet Appliances represent new endeavors with extensive development cycles and consequently carry greater risks of successful and timely execution.
Any one or
more of these factors could result in the Company failing to achieve its expectations as to future revenues and profits. The Company may be unable to adjust spending sufficiently in a timely manner to
compensate for any unexpected sales shortfall, which could materially adversely affect quarterly operating results. Accordingly, the Company believes that period-to-period
comparisons of its operating results should not be relied upon as an indication of future performance. In addition, the results of any quarterly period are not indicative of results to be expected for
a full fiscal year. In future quarters, the Company's operating results may be below the expectations of public market analysts or investors. Since the Company's announcement of its expectation of
declining revenues, gross margins and operating results, the market price of the Common Stock has been and is expected to be for some time in the future, materially adversely affected.

Dependence on Product for Handheld Internet Appliances

The Company recently launched its first highly integrated System-on-Chip (SOC) IC products for smart handheld electronics. This new MiMagic product family
combines the Company's own intellectual property in multimedia hardware acceleration with advanced processing cores obtained from third parties. The Company has exited the market for notebook
multimedia ICs and is now wholly dependant on its new endeavor in the developing market for Handheld Internet Appliances. The Company's future business, financial condition and results of operations
will depend to a significant extent on its ability to rapidly complete development, attract customers, and begin production of its new MiMagic products, as well as to successfully define, develop, and
bring to market successive generations of SOC products.

There
can be no assurances that the Company will be successful in these undertakings. There are numerous competitors seeking to address the market for handheld electronics with SOC
products, some of which may have significantly more resources than NeoMagic including some of the world's largest semiconductor companies. Handheld Internet Appliances and MPEG-4 video are relatively
new technologies, and are characterized by rapidly changing infrastructure, evolving industry standards and uncertain average selling prices. The Company must anticipate the features and functionality
that equipment manufacturers and consumers will demand, incorporate those features and functionality into products that meet the exacting design requirements of equipment manufacturers, price its
products competitively and introduce the products to the market on a timely basis. The success of new product introductions is dependent on several factors, including proper new product definition,
timely completion and introduction of new product designs, the ability to create or acquire intellectual property, the ability of strategic manufacturing partners to effectively implement the
manufacture of new products, quality of new products, differentiation of new products from those of the Company's competitors and market acceptance of the Company's and its customers' products. Within
this rapidly changing market there can be no assurance that the definition of the Company's products will be suitable to actual market conditions, or that particular segments of the market will
achieve anticipated volumes within expected timeframes. Additionally, the Company's customers may also develop products, using the products of the Company, which may not be suitable to changing market
conditions or may not achieve anticipated volumes within expected timeframes.

In
particular, the Company is embarked upon a strategy to enable high-performance multimedia features in Handheld Internet Appliances in a very power-efficient manner. If consumers do
not seek out or demonstrate preference for handheld devices with higher multimedia performance, such as
2-dimensional or 3-dimensional graphics, multi-channel audio, and MPEG-4 video, then demand for the Company's products will be adversely affected.

The
Company intends to continue relying in part upon the integration of large DRAM with analog and logic circuitry, as an available means of product differentiation for at least a
portion of its product

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line. To date, the Company has focused its DRAM integration efforts in its proprietary MagicWare embedded DRAM capability. The integration of large DRAM memory with analog and logic circuitry using
this approach is highly complex. Because of the complexity of its products, however, the Company has experienced delays from time to time in completing development and introduction of new products. In
addition, the Company has recently begun demonstrating and promoting new products in markets in which the Company has no history. In the event that there are delays in the completion of development of
future products, including the products currently being demonstrated but not yet in production, the Company's potential future business, financial condition, and results of operations will be
materially adversely affected. In addition, there can be no assurance that fundamental advances in either the memory or logic components, or packaging, of the Company's products will not significantly
increase the complexity inherent in the design and manufacture of the Company's products, rendering the Company's product technologically infeasible or uncompetitive. The time required for competitors
to develop and introduce competing products may be shorter and manufacturing costs may be better than those experienced by the Company.

Dependence on Manufacturing Relationships

The Company's products require semiconductor wafers manufactured with state-of-the-art fabrication equipment and
technology. NeoMagic has a strategic relationship with Infineon, to produce its semiconductor wafers. The Company also has two other strategic relationships under evaluation. These relationships
enable the Company to concentrate its resources on product design and development, where NeoMagic believes it has greater competitive advantages, and to eliminate the high cost of owning and operating
a semiconductor wafer fabrication facility. The Company depends on these suppliers to allocate to the Company a portion of their manufacturing capacity sufficient to meet the Company's needs, to
produce products of acceptable cost and quality and at acceptable manufacturing yields, and to deliver those products to the Company on a timely basis. A manufacturing disruption experienced by any of
the Company's manufacturing partners would have an adverse effect on the Company's business, financial condition and results of operations. Furthermore, in the event that the transition to the next
generation of manufacturing technologies at one of the Company's suppliers is unsuccessful, the Company's business, financial condition and results of operations would be materially and adversely
affected. Additionally, there can be no assurances that any of the Company's manufacturing partners will continue to devote resources to the production of the Company's products or continue to advance
the process design technologies on which the manufacturing of the Company's products are based.

Dependence on Qualified Personnel

The Company's future success depends in part on the continued service of its key engineering, sales, marketing, manufacturing, finance and executive personnel,
and its ability to identify, hire and retain additional personnel. There is intense competition for qualified personnel in the semiconductor industry, and there can be no assurance that the Company
will be able to continue to attract and retain qualified personnel necessary for the development of its business. The Company has experienced the loss of certain key personnel and also reduced
personnel in its restructuring. If the Company's headcount is not appropriate for its future direction and the Company fails to recruit key personnel critical to its future direction in a timely
manner, it may have a material adverse effect on the Company's business, financial condition and results of operations.

Risks associated with Acquisition of the Assets of LinkUp Systems Corporation

Assuming that the acquisition of assets from LinkUp Systems Corporation ("LinkUp") closes as expected, the Company expects to hire most of LinkUp's 28
employees, to market and sell LinkUp's existing semiconductor products and to use many of the new personnel to assist in the development of

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new products. Risks that could interfere with the Company's ability to achieve its objectives from this acquisition include, among other things risk that customers will not accept the LinkUp products
or will not achieve volume sales for their own products that incorporate the LinkUp chips, and the risk that the Company is unable to hire or retain the former LinkUp employees or is unable to
integrate them effectively into the Company's organization.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

The Company's cash equivalents, short-term investments, and restricted cash are exposed to financial market risk due to fluctuations in interest
rates, which may affect our interest income. As of October 31, 2001, the Company's cash equivalents, short-term investments, and restricted cash earned interest at an average rate
of 4.1%. Due to the short-term nature of the Company's investment portfolio, operating results or cash flows are vulnerable to sudden changes in market interest rates. Assuming a decline
of 10% in the market interest rates at October 31, 2001, with consistent cash balances, interest income for
the remaining quarter of fiscal 2002 would be adversely affected by approximately $100,000. The Company does not use its investment portfolio for trading or other speculative purposes.

Foreign Currency Exchange Risk

Currently all of the Company's sales and substantially all of its expenses are denominated in U.S. dollars. As a result, the Company has relatively little
exposure to foreign currency exchange rate risk. The Company does not currently enter into forward exchange contracts to hedge exposures denominated in foreign currencies or any other derivative
financial instruments for trading or speculative purposes. However, in the event exposure to foreign currency risk increases, the Company may choose to hedge those exposures.

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Part II. Other Information

Item 1. Legal Proceedings

As
a general matter, the semiconductor industry is characterized by substantial litigation, regarding patent and other intellectual property rights. In December 1998, the
Company filed a lawsuit in the United States District Court for the District of Delaware against Trident Microsystems, Inc. The suit alleges that Trident's embedded DRAM graphics accelerators
infringe certain patents held by the Company. In January 1999, Trident filed a counter claim against the Company alleging an attempted monopolization in violation of antitrust laws, arising
from NeoMagic's filing of the patent infringement action against Trident. The Court has ruled that there is no infringement by Trident. Management disagrees with this ruling and has filed an appeal in
the United States Court of Appeals for the Federal Circuit. Management also believes the Company has valid defenses against Trident's claims. There can be no assurance as to the results of the patent
infringement suit and the counter-suit for antitrust filed by Trident.

Item 2.Changes in Securities

None.

Item 3.Defaults Upon Senior Securities

None.

Item 4.Submission of Matters to a Vote of Security Holders

None.

Item 5.Other Information

Not
applicable.

Item 6.Exhibits and Reports on Form 8-K





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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

| |  | NEOMAGIC CORPORATION
(Registrant)                                                                      
| |  | -------------------------------------------------------------------------------------------------------
| |  | /s/STEPHEN T. LANZASTEPHEN T. LANZAChief Financial Officer
(Principal Financial and Accounting Officer)
| |  | December 12, 2001                                                                                      

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